US-CHINA: Staring into the abyss US-CHINA: Staring into the abyss US-CHINA: Staring into the abyss

Macro Digest: A crucial 48 hours for risk

Macro
Picture of Steen Jakobsen
Steen Jakobsen

Chief Investment Officer

The macro backdrop story is this:

The 'credit cake', or the credit impulse plus nominal debt issuance, is collapsing. Since the financial crisis, the world's monetary growth (main debt) has risen more than nominal growth, i.e. World Monetary Growth / World Nominal Growth > 1 (8-10%/4-6%) 

Now, however, world monetary growth is 2-2.5% against 5-6% world growth, so significantly below 1!
We have, along with Saxo Bank macro head Christopher Dembik, exhaustively documented the collapse in the credit impulse (the change of change in credit), which leads the world by nine-12 months.

The question is, where do we go from here?

The Federal Reserve is insisting on normalising policy rates, meaning that the rest of the world (read: emerging markets) are getting less credit at much higher prices. In the US, meanwhile, this liquidity shortfall has been neutralised by tax reforms that see US firms bringing money back home... and thus increasing liquidity foronshore US markets.

Add to this the most aggressive buy-back, dividend, and M&A period in history (to the tune of around $1.2 billion) and you have the reason why the US market has outperformed, and why it could continue to outperform in the short term.

Is contagion happening? It's too early to tell, but with today’s likely announce of an additional $200 billion in tariffs and the market breakdown shown below, the risk is rising.

The action plan

We are still net looking to buy EM risk, but post-today’s announcement. Failure to take out recent EM lows will make us dip our toes; if not, we wait.

The next two trading days will be critical for the overall risk climate, and we will keep you posted as to how we view things playing out.

Now, onto four charts that illustrate the market's present pain:

Tencent

Tencent is the most widely owned stock and maintains the biggest weight in global EM funds. The trend been down since March but now it has broken both its recent low plus the low end of the channel.
 
Tencent
Source: Bloomberg
Alibaba

Alibaba's latest earnings release was reasonably strong, but the company's shares just broke lower. Is this a bad omen for China's tech sector?
Alibaba
Source: Bloomberg
Tesla

Tesla is having a tough time, both in markets and on social media. The TSLA junk bond is now trading at 8% and the default risk is rising fast. Elon Musk's personal life is increasingly becoming a risk to the company itself

The Musk + Trump show is not pretty and I don’t see any good exits/solutions for either of them.
Tesla
Source: Bloomberg
USDINR

Finally, India and its currency are spinning out of control as high energy prices increase its deficit.
USDINR
Source: Bloomberg

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.